Reports out of India are suggesting that the government is planning to arrange a mammoth marriage – uniting all or most 13 state-owned oil firms into one gigantic corporation, which would rival the world’s largest energy companies. It is an interesting proposition and one that the financial markets have cheered, driving a rally on the Mumbai Stock Exchange. But is it feasible, and will deliver on its promise?
The idea behind the mega merger is to create efficiency, slashing through the red tape and bureaucracy that hampers much of Indian business. The merger will not only bring refiners and retailers Indian Oil, BPCL, HPCL, MRPL and upstream producer ONGC under one roof, but also potentially include research and policy units like the Oil Industry Development Board, Petroleum Planning and Analysis Cell and Petroleum Conservation Research Association. It will, in effect, create an all-powerful Ministry of Petroleum that consolidates E&P, refining, distribution and marketing together with national energy policy and international energy diplomacy. It echoes many of the ideas that socialist nations espouse, but even countries like China and Russia have evolved towards devolution. The Ministry of Oil in the USSR was an all-controlling behemoth that imploded as Soviet Russia broke up, and even in centrally-planned China, the oil sector was divided between CNOOC (upstream), CNPC/Petrochina (downstream, north China) and Sinopec (downstream, south China).
On paper, the clout it gives India’s Oil companies is massive. Various Indian oil companies are already jointly lobbying for deals and acquisitions overseas, and bringing them under one roof increases their leverage. The inefficient overlap in many distribution and marketing activities could be consolidated, and the internal bickering that prevents large-scale infrastructure from developing rapidly could be eliminated. The government is obviously in favour of this, having initiated a similar idea back in 2005, which was shot down by a government advisory panel, which favoured smaller, nimbler firms.
One of the arguments back in 2005 was that to create a state monopoly would stifle innovation and eliminate privatisation. That was then, but now the government can point to Reliance and Essar Oil, two private entities that have succeeded in the stifling atmosphere, even though their access to retail is limited. Innovation would be provided by the various state research entities, linked together with the commercial arms under the same central command.
The idea is enticing, and certainly shareholders and investors are excited. But it will ultimately be judged on how well it is executed and if delivers on its promise. State monopolies are a useful tool to push through a coherent energy policy – something that India needs – but their very size and power always creates a distorted market. Monopolies have always broken up – look at Standard Oil and AT&T Bell System in the US – or breed more corruption, like recently in Brazil’s Petrobras. The merger is a short-term solution that will only create more long term complications. If consolidation must be done, India would do well to look at China’s model: ONGC is doing a great job in upstream, as is GAIL for gas. Downstream is where the best potential of consolidation can occur, and policy and research should always be kept separate from commercial concerns. A mega merger is an enticing idea, on paper, but in reality, it would be difficult to work.
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Headline crude prices for the week beginning 12 November 2018 – Brent: US$71/b; WTI: US$60/b
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